Company Update October 7, 2015 Rating matrix Rating : Dropping coverage Syndicate Bank (SYNBN) | 87 Target : NA Target Period : NA Weak performance; dropping coverage… Potential Upside : NA Syndicate Bank (SBL) is a mid-sized public sector bank with over 80 years What’s Changed? of expertise and spread across India through 3559 branches. Despite Target NA some hiccups, the bank has delivered a consistent performance with EPS FY16E NA credit book growth ahead of the industry in the past eight years. EPS FY17E NA Rating Changed from Hold to Dropping Coverage However, in last couple of years, bank too faced the brunt of the economic slowdown with a decline in margins to 2.1% in FY15 compared Quarterly Performance to ~3% in FY13. Asset quality pressure also emerged with GNPA surging Q1FY16 Q1FY15 YoY (%) Q4FY15 QoQ (%) to 3.7% in Q1FY16 vs. ~2% in FY13. NII 1,412 1,351 4.5 1,423 -0.8 Going ahead, an anticipated moderation in credit offtake, low margins and Other income 501 456 9.7 794 -37.0 continued asset quality stress delay an improvement in return ratios, PPP 1,039 1,014 2.5 1,201 -13.5 hovering around 11% RoE and 0.5% RoA. We drop coverage on the PAT 302 485 -37.9 417 -27.6 stock. Investors currently holding the stock may look at larger PSU banks like Bank of Baroda and private banks like Axis Bank and Yes Bank. Key Financials Healthy business growth in past; expect moderation, going ahead | Crore FY14 FY15 FY16E FY17E Syndicate Bank is a mid-sized PSU bank with close to 3559 branches. In NII 5,540 5,514 6,308 7,471 the past eight years, it consistently grew its business above industry PPP 3,563 4,007 4,363 5,243 except in FY10-11, wherein it went into a consolidation phase. Post FY11, PAT 1,711 1,523 1,510 2,057 business traction improved and was above industry at 17% CAGR in FY11-15 with loans at | 202720 crore and deposits at | 255388 crore by Valuation summary FY15. Currently, the book is diversified into corporate, PSL, retail and FY14 FY15E FY16E FY17E MSME. With a fall in inflation and a slowdown in capex on the corporate P/E 2.9 3.4 3.4 2.5 side, we expect business traction to moderate in the coming quarters. P/ABV 0.6 0.6 0.7 0.6 Asset quality pressure to cap margin improvement RoA 0.7 0.5 0.5 0.6 Syndicate Bank’s NIMs declined to 2.3% in FY10 from 3% in FY07 owing RoE 15.2 12.1 11.0 13.9 to its focus on higher growth and also due to higher deterioration in asset quality during FY10. However, in FY11-13, margins improved and have stayed at ~3% due to shedding of bulk deposits (down to 17% in FY13 Stock data from >25% in FY09), maintenance of CASA ratio at >30% levels and Market Capitalisation | 5733 Crore controlled asset quality. However, in FY14 and FY15, margins slipped GNPA (Q1FY16) | 7546 Crore NNPA (Q1FY16) | 4721 Crore significantly to 2.52%, 2.1% mainly due to a sharp spurt in slippages to NIM (Q1FY16) 2.2 | 3628 crore, | 5400 crore, respectively, leading to a significant reversal of 52 week H/L 141 /76 interest income. Going ahead, we rule out any substantial improvement in Equity Capital | 665 Crore NIM considering lingering asset quality pressure. Face value | 10 Asset quality was initially better than peers; still remains a concern DII Holding (%) 10.4 FII Holding (%) 7.6 The bank’s asset quality came under significant pressure in FY10 primarily due to the service sector followed by corporate & personal loans. Price performance (%) However, consolidation in asset growth brought stability in asset quality 1M 3M 6M 12M with GNPA ratio dropping to 2% as on FY13, which was relatively better Syndicate Bank 10.78 -14.50 -16.57 -20.67 than peers. However, asset quality pressure again emerged with GNPA Dena Bank 1.91 -10.39 -21.91 -31.34 surging to 3.7% to | 7546 crore as on Q1FY16. PCR has also declined to Bank of India 8.07 -22.99 -32.46 -40.10 63% from >80% earlier. Going ahead, we expect asset quality woes to IOB 11.16 0.00 -12.84 -34.04 continue though appearances may change with the introduction of the 5:25 scheme and strategic debt restructuring. Research Analyst Asset quality woes, benign return ratio ahead; dropping coverage Kajal Gandhi Driven by MAT credit, FY12, FY13 return ratios seemed higher with [email protected] average RoA, RoE at ~0.8%, 17.5%, respectively. However, the same was Vishal Narnolia unavailable in FY14 and FY15. Due to this, RoE dropped to 15.2% and [email protected] 12%, respectively, apart from subdued operational performance (lower Vasant Lohiya margins, enhanced credit cost). Going ahead, an anticipated moderation [email protected] in credit offtake, low margins and continued asset quality stress would delay improvement in return ratios. We are dropping coverage on the stock. Investors currently holding the stock may look at larger PSU banks like SBI and private banks like Axis Bank and DCB. ICICI Securities Ltd | Retail Equity Research Company Analysis Business growth still maintained high, can be worrisome for future Syndicate Bank’s loan book as on Q1FY16 was at | 202927 crore with domestic advances amounting to | 162437 crore. In the past three years, domestic advances grew at a CAGR of 15% while foreign advances increased at >30% CAGR in FY12-15 partly supported by rupee depreciation. The bank’s loan book is well diversified between corporate (36%), PSL (36%), retail (15%) and SME (14%). Deposits amount to | 269495 crore with CASA deposits of | 65379 crore constituting 27.3%. The domestic CASA ratio has been maintained at ~30% for the past five years despite increased competition owing to a sustainable increase in branches, concentrated focus on CASA build-up and a significant presence in the southern region, which accounts for the second highest CASA mobilisation in India after the western region. If we consider the past eight years, the bank has consistently grown its business above industry except in FY10-11 wherein it went into a consolidation phase. During FY06-09, loan CAGR was 31%, which got reduced to 14% over FY10-11 owing to a sharp spurt in NPAs (absolute We have factored in business CAGR of 16% over FY15-17E GNPA rose 26% YoY in FY10). This made the bank take a re-look at its with loans increasing to | 270641 crore and deposits at strategy. Post FY11, the bank’s business traction improved and was | 350730 crore above industry at 17% CAGR over FY11-15. Going ahead, the management expect loans and deposit growth to be slightly above the industry growth. We have built in business CAGR of 16% over FY15-17E with loans rising to | 270641 crore & deposits at | 350730 crore. Q1FY16 credit growth was also strong at 15% YoY. Exhibit 1: Business traction to stay ahead of industry 400000 35.0 27.3 350000 30.0 24.0 29 300000 25 25 25.0 18.1 19.4 18.1 250000 21.0 21.8 17.9 16.8 16.6 15.8 20.3 15.0 15.0 16.1 20.0 200000 18 13.6 18.5 (%) 17.4 16.5 15.9 10.9 15.9 14.6 15.0 (| crore)(| 150000 100000 10.0 50000 5.0 0 64051 95171 81532 115885 90406 1.0117026 106782 135596 123620 157941 147569 185356 173912 212343 176442 214863 173845 239215 183876 251469 202715 255387 202927 269495 233138 296042 270641 350730 0.0 FY08 FY09 FY10 FY11 FY12 FY13 FY14 Q1FY15 Q2FY15 Q3FY15 FY15 Q1FY16 FY16E FY17E Advances Deposits Advances Growth (YoY) (RHS) Deposits Growth (YoY) (RHS) Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 2 Exhibit 2: Corporate & PSL segment remain major components SME 12% Corporate Retail 36% 15% Priority sector 37% Source: Company, ICICIdirect.com Research Lower margins to stay, against management guidance of pick-up We expect the bank’s calculated NIMs to remain steady at ~2.1% over FY15-17E on the back of stable CASA and steady business growth. We believe the focus on retail loans, going ahead, and within that on home loans, which are available at the base rate in order to be competitive, will keep margin upsides under check. The management is banking on an improvement in overseas margins from 0.3% to ~0.5-0.6% for an We expect the bank’s calculated NIMs to remain steady at improvement in overall NIMs, which we believe is difficult considering the ~2.1% over FY15-17E global economic scenario. Further, fresh slippages will continue though going ahead, which will keep pressure on margins. Syndicate Bank’s NIMs had declined to 2.3% in FY10 from 3% in FY07 owing to its focus on higher growth and also due to higher deterioration in asset quality during FY10. However, in FY11-13, margins improved and remained at ~3% due to shedding of bulk deposits (down to 17% in FY13 from >25% in FY09), maintenance of CASA ratio >30% levels despite competition from private banks and controlled asset quality. However, in FY14 and FY15, margins slipped significantly to 2.52% and 2.1% mainly due to a sharp spurt in slippages to | 3628 crore and | 5400 crore, respectively, leading to a significant reversal of interest income. Exhibit 3: Calculated margins to stay near 2.1% in FY15-17E 3.5 3.2 3.3 3.0 2.9 2.5 2.5 2.6 2.3 2.3 2.1 2.0 2.1 2.1 (%) 1.5 1.0 0.5 0.0 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E NIMs (Calculated) Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 3 Asset quality was initially better than peers; still remains a concern Syndicate Bank’s asset quality has been relatively better than peers.